In yesterday’s Wall Street Journal there was a relatively small item that, no doubt, many people missed. On the surface, of course, there is no particular reason why anyone should pay attention to it . . . and that might be the biggest problem of all.
On page A7, there was an article, “Italy Vows to Defy EU Rules.” Most people would have read no further than that, assuming that there was some regulation about internal trade, immigration, or something else that was of no interest outside Europe, and not even very much of Europe.
|An economic Catch-22.|
No, the problem is the restriction on the amount of debt the government of Italy is allowed to issue. This is a big problem, because Italy’s GDP is falling, and there is a serious lack of financing for new capital projects.
That is to say, this is a big problem if you assume that the money supply, and thus the source of financing for new capital projects, can only be backed by government debt. That, in effect, creates a Catch-22 situation. You can’t have growth unless you burden yourself with debt that you are already unable to repay. If you grow economically, you assume more debt you can’t repay, and if you repay debt (or try to) you won’t be able to grow to finance the debt repayment.
And people wonder why we reject the principles of Keynesian economics!
|Is this the fault of the banks, or of Keynes?|
The fact of the matter is that Italy’s problem can be solved with ease, and in a way that not only doesn’t require additional government debt, it can lead to paying down the debt that is already outstanding. The only thing that absolutely must be done is to start using the banking system — the commercial banks backed up with the central bank — the way it was intended to be used: to finance private sector development, not to monetize government deficits.
It comes as a stunning surprise to many people that central banks were not invented to finance government operations, nor are commercial banks engaged in a criminal conspiracy against the people by creating money that only government has the right to create. The fact is that government doesn’t actually have a natural right to create money.
Okay, strictly speaking, a government has no natural rights at all. Only natural persons have natural rights, and a government is an artificial person, a “legal fiction” created by human beings who are natural persons. When we say a government has no natural right to create money, we mean that the nature of government is such that it does not as one of its natural functions create money.
|John Locke: taxes a fee for government|
That is not the same as saying that government does not have the right by nature to regulate the currency and enforce contracts. Money derives from production, however, and government by its nature is not a producer of marketable goods and services that require money to be exchanged. Government is a service for which the citizens pay a fee called “taxes” in order to receive the services. Allowing government to create money means that it is not accountable to that degree to the citizens — which means the government is in charge, not the citizens.
So what Italy could do, and in fact should be doing, along with everybody else, is turning the value of existing inventories of goods into money for trade and commerce and turning the value of future capital into money for new capital formation. That is what commercial banks were invented to do in the first place, with central banks coming along to make it easier. All government has to do is set the value of the currency, and make certain all contracts are kept.
That is the short term solution. It gets Italy out of the hole its in with respect to the presumed scarcity of money. The long term solution is to get everybody on board with the program by making it possible for everybody to purchase part of the new capital formation that would be financed. They can do this by purchasing newly issued shares that finance the new capital, making dividends tax deductible at the corporate level, paying out all earnings as dividends, and repaying the credit extended to purchase shares out of the dividends on a tax-deferred basis.
Afterwards, the dividends can be taxed as personal income to the recipient and the balance used for consumption purposes. This would take a great burden off the government and increase tax revenues at the same time, allowing repayment of the outstanding debt without imposing austerity measures that only cripple growth.
Such a program is described in CESJ’s Capital Homesteading proposal. It’s something to think about.